Price of Risk - Recent Evidence from Large Financials Karim Youssef

ISBN: 9786613866592

Published: August 1st 2010

ebook

14 pages


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Price of Risk - Recent Evidence from Large Financials  by  Karim Youssef

Price of Risk - Recent Evidence from Large Financials by Karim Youssef
August 1st 2010 | ebook | PDF, EPUB, FB2, DjVu, AUDIO, mp3, ZIP | 14 pages | ISBN: 9786613866592 | 5.49 Mb

Probability of default (PD) measures have been widely used in estimating potential losses of, and contagion among, large financial institutions. In a period of financial stress however, the existing methods to compute PDs and generate loss estimatesMoreProbability of default (PD) measures have been widely used in estimating potential losses of, and contagion among, large financial institutions. In a period of financial stress however, the existing methods to compute PDs and generate loss estimates that may vary significantly.

This paper discusses three issues that should be taken into account in using PD-based methodologies for loss or contagion analyses: (i) the use of - risk-neutral probabilities - vs. -real-world probabilities- - (ii) the divergence between movements in credit and equity markets during periods of financial stress- and (iii) the assumption of stochastic vs.

fixed recovery for financial institutions assets. All three elements have nontrivial implications for providing an accurate estimate of default probabilities and associated losses as inputs for setting policies related to large banks in distress.



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